VII #70 — Do Demographic Changes Affect Stock Returns?

I’ve posted Entry #70 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Do Demographic Changes Affect Stock Returns?

Juicy Excerpt: Demand for stocks doesn’t matter, according to the VII Model. Demand of course has a temporary effect. When lots of investors want to own lots of stocks, that pushes prices upward. But it is a key precept of this model that, while prices often do not reflect the economic realities in the short term, they always do in the long term (that is, after the passage of 10 years or so of time). Demographic changes could push stock prices up hard or down hard for a time. But demographic changes do not alone determine true value. To the extent that demographic effects only affect the demand for stocks and do not affect the productivity of the economy, demographics have an effect only in the short term.

Demographics are like a lot of other potential factors. Some suggest watching inflation rates to know where stock prices are headed. Some say to watch political developments. Some say to watch consumer confidence. The Valuation-Informed Indexer views all of these as temporary effects. They can affect perceptions of value. But generally they do not signal permanent changes in stock values. The U.S. economy has been sufficiently productive to support a 6.5 percent real annual return for as far back as we have records. So long as that remains so, you don’t need to be concerned about any non-valuation factors if you are investing for the long run.


  1. arty says

    There are an infinite number of data points that confound many pro investors, who feel the need to worry about all of them—missing the forest for the trees, making bad guesses on what is actionable and not, and wasting lots of time and costs.

    If PE/10 were the only metric an investor worried about (coupled with their age and retirement status) they’d be fine.

  2. Rob says

    Yes. If it’s not actionable, don’t waste your time on it.

    Stuff that isn’t leading you in the right direction isn’t neutral. It is leading you in the wrong direction (even if only by adding confusion and wasting time).


  3. Evidence Based Investing says

    The U.S. economy has been sufficiently productive to support a 6.5 percent real annual return for as far back as we have records.

    I think you need to reread Bill Bernstein.

    The Returns Fairy. . . Explained

    Juicy Excerpt

    Over the past century, the per-capita growth of GDP in the U.S., the world’s most successful economy, has been about 2% after inflation and shows no sign of acceleration in the past quarter century. It is impossible for long-term corporate growth to be higher than GDP growth for this would entail corporate profits eventually growing larger than the economy itself.

  4. Rob says

    I’m grateful to you for sharing your thoughts (and the link), Evidence.

    I stand by my statement.


  5. what says

    Unfortunately you are ‘standing by it’ without anything to back it up other than ‘I hope it keeps returning 6.5% real!’

  6. Rob says

    That’s not so, What.

    I would be happy to see our economy become so productive that the average long-term return could rise above 6.5 percent real. I can see circumstances in which that could happen and I think that would be super.

    I personally would not count on it. I think the more likely scenario is that stocks will continue to perform in the future at least somewhat as they always have in the past. But I certainly don’t object if some believe we are going to see better days. We need optimists!


  7. what says

    I also believe stocks will perform somewhat like they have in the past. Of course, the past is way more broad than the S&P 500. Somewhere, stocks will return 6.5% real over a long period of time but it may not be U.S. stocks.

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